Aerospace set to reap fruits of Orange Revolution

The dramatic victory of Ukrainian President Viktor Yushchenko and his self-styled Orange Revolution in December last year has brought numerous changes to the government of this former Soviet republic–many geared toward ultimate integration into the European Union (EU). They include changes to the legal code to reform the business environment, attempts to attract foreign investment in valuable and formerly state-owned enterprises and even some crackdowns on corruption.

As of May 1, Ukraine had even abandoned the bureaucratically clumsy and authoritarian visa regime of the Soviet era. Anyone carrying an EU member state passport can now enter the country without a visa for stays of 90 days or less.

But a leftover relic from the Soviet times remains–the structure of the Ukrainian aviation industrial base. “There is nothing intrinsically wrong with Ukrainian aviation or our potential for competing on the world market,” said Pavel Naumenko, general director of the Kharkhiv State Aviation Production Enterprise. “But what we do need for the future of Ukraine’s aerospace sector is some new thinking–new ideas– and fresh blood.”

Naumenko meant to encapsulate what has proven a long-suffering effort to consolidate Ukraine’s major aviation industrial facilities into one corporate entity. Until the new government took power, the effort yielded little progress due to the entrenched interests and political clout of the long-time general designer of the Aviation and Scientific Technical Complex (ANTK) Antonov Design Bureau, Pyotr Balabuyev, who has long opposed integration. However, Balabuyev retired on May 25, marking the departure of the last of the Soviet-era “Red Directors.”

The plan approved by the Ukrainian government calls for the Kharkhiv plant, ANTK Antonov, and the Aviant plant–the latter two of which are in Kiev–to become the nucleus of this newly unified company. The Kharkhiv plant, which holds most of the country’s orders for new aircraft, will probably assume the dominant role in this triumvirate once all of the dust of creating the new union of these enterprises has settled.

“This does not mean, however,” said one Kharkhiv official, “that Antonov programs in the future are going to be focused solely on the production of smaller, turboprop aircraft like the An-140.” The twin-engine turboprop has sold well for Kharkhiv, but the factory officials concede “that both the market and the prospects for growing this type of design are limited and that the world is really one in which jet aircraft are the primary means of commercial and cargo transport.”

“The most important aspect to this amalgamation is that there will now be one point of contact for customers who have issues with design changes or defects, servicing, spare parts, et cetera; one group of executives that is responsible for financial planning and marketing, and one central point for coordination of design and development work,” said Naumenko. According to other officials familiar with problems of the recent past, the separation of powers among the three entities has caused no small degree of frustration and confusion.

“As the manufacturers of designs that come from ANTK Antonov we understand about some of the problems and modifications requested by operators of the aircraft, but we are not authorized to make any such changes,” said one Kharkhiv representative. “We have to instead refer the customer to make formal requests to the design bureau on their own. But the design bureau is in business to develop new aircraft first and worry about older aircraft second and is not always willing to put these sort of engineering tasks at the top of their list.”

But the apparent good news that the three components will not become the Antonov Corporation comes with some unresolved difficulties.

Although three programs–the An-148, the An-70 and the An-124–offer some real promise for the future of Antonov, the bureau must answer many questions before the latter two can move forward. This is notwithstanding Antonov’s claim that the An-70, as one engineer said, “Is a much cheaper and more rugged A-400M, there are dim prospecsts for the program without some significant investment and/or a major order from a customer.”

The Russian air force, presumed a major partner when the program began, has not lived up to its original promise of becoming the launch customer. The government promised three aircraft to the Czech Republic in 2002 as part of a plan to retire Soviet-era debt to the Czechs, and seven more to Russia and five to Ukraine, but the big orders for this aircraft remain elusive.

Another prospect involves a re-start of the An-124 production line with a modernized version. “There are only about 20 of these aircraft in commercial service now,” said one analyst familiar with the market for the aircraft, “and this is not enough to satisfy current demand.” But although the need for more of the transport aircraft does exist, a new manufacturing plan faces some obstacles.

The Soviet era An-124s originally were built in three locations–Kiev; Ulyanovsk, Russia, and Tashkent, Uzbekistan. If production resumes, the powers that be have decided not to involve the Uzbeks, thereby creating a dilemma in that the plant in Tashkent built the wings–one of the most technically complex parts of the aircraft. A new production plan that includes just two of the original three production centers will require new wing tooling at one of the two–an expensive prospect and will require some agreement on splitting the cost between the Russian and Ukrainian halves of the program.

However, before Antonov tackles this issue it has to come to terms with an international riff that has cut off most of the revenue it needs to finance any new programs.

On May 30, 2002, an international arbitration court in Stockholm, Sweden ruled that Ukraine’s State Property Fund (SPF) must repay a Cyprus-registered firm, TMR Energy Ltd., just over $42 million. It awarded the judgment for violations of provisions in the statutory agreement between the Cypriot company and the SPF, both of which held a 50-percent stake in the Lysychansk Oil Refinery in Lugansk, Ukraine. The Swedish court accepted the evidence provided and the argument by TMR Energy, which stated that the SPF should recoup modernization costs after the SPF failed to include TMR Energy in incorporation documents.

Sweden can therefore petition all nations that have signed an international protocol to recognize the agreements of the Stockholm court to seize any Ukrainian state property that enters its borders. Because Antonov is state-owned, this would include An-124s from the commercial fleet.

Two An-124s–one in Canada in June 2003 and a second last September in Belgium–have been seized under this court order, and Antonov won’t risk losing any more aircraft by flying them to the Americas or the EU. Money earned from these cargo flights to the U.S., Canada, and Europe kept the design bureau running, so this situation could put a significant damper on its future plans.

The situation resembles the comical scenes Russian firms faced a few years ago when a lawsuit filed by a Swiss company, Noga, had Russian fighter aircraft leaving in the middle of the 2001 Paris Air Show, one step ahead of a platoon of lawyers holding seizure orders from a French court. The situation kept Russian firms from bringing aircraft to Le Bourget, ILA and Farnborough for several years.

According to Naumenko, Ukrainian President Yushchenko has ordered the problem resolved, but until that day the Ukrainian aircraft maker will not bring any of its own aircraft to international expositions. “One would think that someone in the Kuchma government would have learned from the Russians’ mistakes,” said one Ukrainian aerospace official. “The fact that they did not is perhaps one of the reasons the Orange Revolution succeeded.”